Thursday, June 18, 2009

Treasuries Decline as Total Benefit Rolls Plunge, Supply Looms

Treasuries fell for a second day as the total number of people collecting unemployment insurance dropped for the first time since January and the U.S. announces the amount of 2-, 5- and 7-year notes it will sell next week.

Ten-year yields climbed from a two-week low amid concern President Barack Obama’s record borrowing will overwhelm demand as the deepest recession in 50 years shows signs of easing. The Labor Department said the number of people collecting unemployment insurance fell by 148,000 in the week ended June 2, the most since November 2001, to 6.69 million.

“Continuing claims were not as weak as they have been, so people are selling securities to set up for next week’s auction process,” said Thomas Tucci, head of U.S. government bond trading at RBC Capital Markets in New York, the investment- banking arm of Canada’s biggest lender.

The 10-year note yield rose six basis points, or 0.06 percentage point, to 3.75 percent as of 9:06 a.m. in New York, according to BGCantor Market Data. The 3.125 percent security maturing in May 2019 fell 15/32, or $4.69 per $1,000 face amount, to 94 25/32. The yield touched 3.58 percent yesterday, the lowest level since June 4.

The Treasury Department will probably auction $40 billion in two-year notes, $35 billion of five-year debt and $26 billion of seven-year securities, according to Wrightson ICAP LLC, a Jersey City, New Jersey-based research company.

Record Sales

“We have another situation in the dealer community where they are anticipating supply and would like to see a concession develop before the auctions,” said David Coard, head of fixed- income trading in New York at Williams Capital Group, a brokerage for institutional investors.

Initial jobless claims rose by 3,000 to 608,000 in the week ended June 13, in line with forecasts, from a revised 605,000 the prior week, the Labor Department said today in Washington.

U.S. government debt has handed investors a loss of 3.8 percent since March, according to Merrill Lynch & Co. indexes. U.S. securities are set for the worst quarter since losing 5.9 percent in the first three months of 1980, the data show.

Obama has pushed the nation’s marketable debt to an unprecedented $6.45 trillion. The Congressional Budget Office projects the federal budget shortfall will reach a record $1.85 trillion this year, with the gap exceeding $600 billion through the year 2019.

Need Some Time

The U.S. may sell a record $3.25 trillion of debt this fiscal year ending Sept. 30, almost four times 2008’s $892 billion, according to Goldman Sachs Group Inc., one of the 17 primary dealers that are required to bid at government debt auctions.

China may increase its holdings of U.S. Treasuries in the “near” term should the dollar remain stable, China Finance magazine reported in an article written by Dai Xianglong, chairman of China’s national pension fund. China is the largest U.S. creditor, holding $763.5 billion of U.S. debt as of April, according to Treasury Department figures.

The nation will need some time to diversify its foreign- exchange reserve holdings and the U.S. government should take “substantial” measures to honor its promise of ensuring the safety of foreign investments, Dai, who is a former central bank governor, wrote in an article in the Chinese-language publication. China Finance is affiliated with the People’s Bank of China.

The U.S. government must rely on foreign investors to sustain record borrowing.

‘Not Yet Concrete’

An index of U.S. leading economic indicators probably rose in May for a second straight month, reinforcing speculation the recession may end this year. The Conference Board’s gauge of the economic outlook for the next three to six months climbed 1 percent, according to the median forecast in a Bloomberg News survey. That would match April’s gain and mark the first back- to-back increase since September-October 2006.

The economic recovery is “not yet concrete” and yields may remain stable at current levels until September, said Giuseppe Maraffino, a fixed-income strategist in Milan at UniCredit Markets & Investment Banking.

“There are still problems and the jobs market remains weak, so the recovery is not yet concrete,” Maraffino said. “In the short term, Treasuries will remain well bid.”

The cost of living increased 0.1 percent last month after no change in April, the Labor Department said yesterday. On an annual basis, prices fell 1.3 percent. That means 10-year notes yield 5 percent after accounting for costs in the economy. The so-called real yield last rose above 5 percent in 1994.

Lending Rate

The less-than-anticipated increase in consumer prices may allow Fed policy makers to keep the benchmark lending rate between banks at a low level for longer. The Fed’s target rate is at a record low range of zero to 0.25 percent.

Futures trading on the Chicago Board of Trade indicate a 45 percent chance the central bank will raise interest rates by the end of the year, down from more than 60 percent a week ago. The Federal Open Market Committee meets on monetary policy June 24 and 25.

The difference between rates on 10-year notes and Treasury Inflation Protected Securities, or TIPS, which reflects the outlook among traders for consumer prices, fell to 1.76 percentage points today, from 2.02 percentage points a week ago. The figure has averaged 2.23 percentage points for the past five years.